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Department of Labor’s Advisor Crackdown Speeding Out of Control

BenefitsPro article by Allen Greenberg (used with permission)

dol-buildingBruce Ashton thinks he has a pretty good idea why any retirement plan advisors might have failed to show up Wednesday for his presentation on the Department of Labor’s investigations of RIAs and broker-dealers.

“They’ve either already gone through an investigation or they’re in la-la land,” Ashton said.

It was meant as a joke, of course, but the comment didn’t evoke much laughter, a reflection no doubt of the growing concern among advisors, brokers and plan sponsors that the DOL has, as Ashton put it, “careened out of control, in some respects.”

Whether it has or not, the DOL has unquestionably become more aggressive in its pursuit of potential offenders. The agency conducted more than 3,600 audits of qualified retirement plans last year. Settlements related to violations totaled $1.7 billion in plan reimbursements and fines.

Ashton, speaking at the Center for Due Diligence conference here, went beyond merely expressing concern about potentially overzealous government investigators. He was disdainful of the DOL’s approach in a number of his observations. Among them:

  • The DOL has no qualms asking for information where it has no jurisdiction.
  • The DOL will contact an advisor’s clients. “They don’t seem to care how much disruption the process causes the firm under investigation,” he said.
  • The DOL doesn’t have any sense whether its probe will go anywhere or not.
  • DOL investigators don’t seem to be very well trained, in some respects.

Ashton shared some of the details of a client’s experience to underscore his points. This particular client, he said, is a dual-registered broker-dealer and RIA who provides wealth management, investment advice to retirement plans and is an advisor to a mutual fund.

In its probe, the DOL has asked the client for a number of items that Ashton expected would be sought, including a list of plan accounts, copies of its contracts and 408(b)(2) disclosure forms.

Less expected, if not surprising, was the DOL’s request to see a list of all of the advisor’s wealth clients and all of the mutual fund investors. The DOL also asked to review the advisor’s general ledger. And it also contacted the advisor’s clients asking for information, sharing with them that its request was being made in connection with an investigation of the firm.

“Fortunately,” Ashton said, “we had crafted something to alert clients. Yet some of them were naturally spooked after being contacted by the DOL.”

Joan Neri, another Drinker Biddle attorney, said the DOL seems especially keen on rooting out advisors who commit prohibited transactions, whether deliberately or not.

Improper or incomplete disclosures get advisors into trouble, she said, including failing to acknowledge that they are, in fact, acting as a fiduciary when rendering investment advice to a plan’s investment committee.

What has the DOL most concerned, she said, are advisors who use their positions to generate additional fees for themselves or their affiliates.

Ashton warned that the DOL’s deadline may be short and that much of the information it requests may not be readily available.

That’s why, he said, it’s important to try to negotiate with the agency on some of its demands.

“Don’t just get their letter and start scurrying around for everything they want,” he said.

In some cases, advisors might go so far as to ask the DOL to issue a subpoena for what it wants. Doing so allows advisors to explain to angry clients that they were compelled by law to provide the DOL with the information.

Source: benefitspro.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/headlines/dols-advisor-crackdown

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Market Turbulence Serves as Reminder to Tread Lightly

NYT article by Tara Siegel Bernard

Stock-market-The recent tremors in the stock and bond markets are unnerving — and may leave average investors feeling as if they should be doing something to protect themselves.

But if any lesson should have been learned from the last recession, it was the importance of having a well-diversified portfolio and resisting the urge to sell in a state of panic.

So consider the recent gyrations as a warning signal — not of impending market doom, but a nudge to ensure your investments are on firm footing to withstand whatever happens to blow through the financial markets.

“This is a reminder that the market goes up and the market goes down, and this is normal,” said Stuart Ritter, a senior financial planner at T. Rowe Price. “One of the worst things people can do is draw the conclusion that something different has happened and therefore they should abandon their strategy. The flip side of that is they should have a strategy in place, and not one that is driven by what the market did in the past three hours.”

Some financial advisers emailed letters to their clients this week, urging them to ignore the headlines — a sound idea for investors who are trying to ascertain if their overall approach is still working. Are stocks overvalued? Possibly. Will a slowing European economy destabilize the faltering recovery here in the United States? Perhaps. Is this a moment to get a better grip on the bond market? Absolutely.

The point is, nobody can predict what will happen; the stock market is, and always has been, a gamble. But the right combination of stocks and bonds can reduce overall risks, even in dire circumstances. Investors holding all of their money in stocks during the downturn of 2008 to 2009 had to wait three years to break even, according to Vanguard. But people with investments split evenly between stocks and bonds recovered just 18 months later.

Here are some ideas on how to ensure your portfolio is still working for you:

CONTEXT

As of Wednesday’s market close, the Standard & Poor’s 500-stock index was down 7.4 percent from its high of 2011.36 on Sept. 18. Technically speaking, it takes a 10 percent plunge to qualify as a correction, and a 20 percent fall to move into bear market territory, said Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.

Also on Wednesday, the yield on the 10-year Treasury note briefly fell below 2 percent, crossing a symbolic threshold that signaled investors were rushing for safety; bond prices and yields move in opposite directions, so prices on longer-term bonds increased.

In other words, diversification worked: while stocks slumped, longer-term bond prices picked up some of the slack. “The market declines are pretty normal,” said Fran Kinniry, a principal in Vanguard’s Investment Strategy Group. “But the good news is that diversified portfolios are seeing a rally in high-quality, fixed-income investments.”

And when you consider that most people don’t — or at least shouldn’t — have 100 percent of their money invested in large American stocks, the losses aren’t as severe.

INVESTMENT MIX

An investor’s ideal mix of stocks and bonds — known as an asset allocation — will vary based on overall goals, age, time horizon and personal circumstances. It’s one of the most important decisions investors can make because it determines how much risk they are willing to take in exchange for a chance at a decent return, experts said.

“The right asset allocation is the one that brings you to your financial goal because you’re able to maintain it during all market conditions,” said Rick Ferri, the founder of the money management firm Portfolio Solutions and author of “All About Asset Allocation.”

Investors can find some different combinations of stocks and bonds that can serve as guideposts, including those outlined in Mr. Ferri’s book. For example, people who are three to five years from retirement with a moderate tolerance for risk might split their money evenly between stocks and bonds, though a more conservative investor might put only 30 percent in stocks. A younger saver early in her career, for instance, might consider anywhere from 60 to 80 percent in stocks, he said.

But it’s not quite that easy, either. “Finding the right asset allocation isn’t as simple as ‘your age in bonds,’ ” he said, referring to the old maxim. “There are many 70-year-old people who can and should have more than 30 percent in stocks, and there are many 30-year-old investors who have difficulty with 70 percent in stocks.”

RISK TOLERANCE

Think back to the severe market downturn in 2008 to 2009, which served as investors’ ultimate test. Were you able to ride out the market tumult? Investors who felt compelled to do something, or who dumped piles of stock holdings, were invested too aggressively, financial advisers said. If the most recent gyrations are tempting you to make rash moves, then your investment mix is probably too heavily tilted toward stocks.

This is important for everyone, but probably even more so for retirees; selling stock funds while they are down will either lock in losses, or if the investors try to get back in the market there will be less time for them to recover. “Pick an asset allocation range for stocks you can live with for the long run,” said Allan Roth, a certified financial planner in Colorado Springs. “It should be set so that you would have the courage to buy more stocks when they plunge so you can stick with that allocation.”

BOND CHECK

During the financial crisis, many investors realized that they were holding bonds that were riskier than they thought, and they didn’t provide an adequate counterbalance against plunging stocks. Bonds are also sensitive to interest rates, which is why you want a diversified portfolio of bonds that won’t fluctuate too much if rates move too far in one direction. Remember that even high-profile bond managers such as Bill Gross, formerly of Pimco, have made big directional bets on interest rates that have proved wrong.

That is why investors are usually best served by holding bonds in low-cost index mutual funds that invest in a diversified array of high-quality holdings, financial advisers said. (Higher net-worth investors, or those who are tax-sensitive, should seek tax-exempt bond funds.)

“Make sure your bonds are high-quality, or mostly U.S. government-backed,” Mr. Roth said. “The last thing you need is your bonds to get crushed when your stocks do, as what happened to many in 2008 and 2009. Bonds need to be boring and hold value.”

A bond’s “duration,” measured in years, will provide a general idea of how a bond fund might behave if interest rates were to fluctuate. It’s a rough measure, but generally speaking, for every percentage point that interest rates rise (or fall), a bond’s value will decline (or increase) by its duration. Bonds with shorter durations are less sensitive to interest rates (the faster the bond matures, the more quickly you can reinvest the money at a potentially higher interest rate.)

So if rates fell by one percentage point, the Vanguard Total Bond Market Index fund, which has a duration of 5.7 years, would rise by 5.7 percent. But since the fund also pays investors income — it has a yield of about 2.1 percent — it would post a total return of 7.8 percent, explained Mr. Kinniry of Vanguard. Conversely, if rates were to rise by one percentage point, the fund would lose 3.6 percent.

REBALANCE

This is the process of trimming back winning investments and reinvesting the money into laggards so that a portfolio maintains the overall mix that was originally set. But this can make investors uneasy since they are buying losing investments. Some opt to remove the emotion from the process and use services that will rebalance automatically. “Sometimes it is counterintuitive to rebalance after a period like this, but that is where you can receive some of your benefits,” said Reed Fraasa, a financial planner in New Jersey.

GETTING ADVICE

For investors who don’t feel confident enough to sort this out on their own, it is possible to find an unbiased, fee-only financial planner through organizations like the National Association of Personal Financial Advisors, the Garrett Planning Network or XY Planning Network. There is also a growing industry of online investment managers — sometimes called robo-advisers — that will handle the entire task for a relatively modest fee.

Still unsure what to do? David Yeske, a financial planner in San Francisco, recently sent out a calming note to his clients explaining that downturns are inevitable, but he offered another strategy. He offered some “fun and uplifting” distractions from the scary headlines, and he provided links to videos featuring a rendition of “Stand by Me,” and a flash mob.

Source:  nytimes.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/news/market-turbulence

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Ebola is Spooking Wall Street

CNN Money News article by Matt Egan

ebola-market-sentiment-The Ebola epidemic is starting to contaminate sentiment on Wall Street, which is already losing sleep over countless crises.

The arrival of Ebola in the U.S. has coincided with a period of extreme turbulence in the stock market, which has tumbled about 8% from record highs.

The deadly virus is clearly not the only factor behind the market slide, but it’s a major unknown that is increasingly weighing on market psychology. That was the case again on Wednesday as the Dow plummeted as much as 370 points and health officials revealed a second health-care worker in Dallas tested positive for Ebola.

Ebola fears are most obvious in the airline sector. Shares of American Airlines Group (AAL) and Delta Air Lines (DAL) fell sharply on Wednesday, hurt by the news that the new Ebola patient flew the day before being diagnosed. Both airlines are down nearly 20% over the past month alone.

“The fear is that people will be afraid to fly,” said Jason Weisberg, managing director at Seaport Securities.

Other sectors being caught in the Ebola downdraft include the cruise industry, where Royal Caribbean Cruises (RCL) and Carnival (CCL) have tumbled nearly 20% from their 52-week highs.

Hotel stocks like Hilton Worldwide (HLT) and Starwood Hotels & Resorts Worldwide (HOT) have also been punished by the Ebola concerns.

Extreme fear: The Ebola scare is not having an impact on many businesses at this point. For that to happen, the deadly virus would have to spread much more rapidly in the West. That means earnings — the fundamental component of stock prices — aren’t being hit.

However, market psychology, which has become increasingly fragile, is clearly being hurt by the Ebola epidemic.

“The stock market is now driven by emotion rather than fundamentals. The former rapidly switches from greed to fear on Ebola news,” Ed Yardeni, president of investment advisory Yardeni Research, wrote in a note on Wednesday.

Just check out CNNMoney’s Fear & Greed Index. It tumbled to zero for the second time ever earlier this week, indicating “extreme fear.” Just a few months ago it was flashing “extreme greed” as stocks cruised to record highs.

The VIX gauge of market volatility has spiked 90% over just the past month alone as wild market swings have become the norm.

To be sure, Ebola is not the main driver of the current market pullback. There have been plenty of other negative headlines to go along with Ebola, including Europe’s gloomy economy, the energy price meltdown, new gains by ISIS in Iraq and worries that global central bankers are out of ammo.

It’s all “added up to a nasty, snowballing environment of shoulder tapping and second guessing that continues to keep rallies under lock and key,” Michael Block, chief market strategist at Rhino Trading, wrote in a note on Wednesday.

A number of investors believe Monday’s late-day nosedive was caused by a false alarm about passengers with flu-like symptoms being removed from a flight in Boston.

Greed isn’t dead: Wall Street never misses a chance to make money. Investors are betting that at least some companies will be able to capitalize on the epidemic.

However, it’s important to remember these stocks have very small market valuations, making them potentially risky and speculative plays, especially for retail investors.

Shares of Tekmira Pharmaceuticals (TKMR), which is working on an experimental Ebola drug, have soared 200% this year.

Another bright spot has been Lakeland Industries (LAKE). The Hazmat suit maker has skyrocketed almost 300% over just the last three months alone even though it remains a risky bet.

While fear continues to dominate Wall Street, some believe the recent chaos has given investors sitting on the sidelines a chance to jump into the stock market. That could explain why the Dow erased more than half of its early 370-point plunge on Wednesday.

“We’re seeing stocks at some levels that are very, very attractive. Unless you think the world is going to suffer a complete meltdown here, this is a very good buying opportunity,” said Weisberg.

Source:  money.cnn.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/news/ebola

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Mark Zuckerberg Is Giving $25 Million To Fight Ebola

Forbes article by Luisa Kroll 

mark-zuckerbergMark Zuckerberg and his wife Priscilla Chan announced plans to donate $25 million to the Centers for Disease Control Foundation to help fight Ebola.

“The Ebola epidemic is at a critical turning point. It has infected 8,400 people so far, but it is spreading very quickly and projections suggest it could infect 1 million people or more over the next several months if not addressed,” Zuckerberg said in a statement posted to his Facebook page. “We need to get Ebola under control in the near term so that it doesn’t spread further and become a long term global health crisis that we end up fighting for decades at large scale, like HIV or polio.” The Facebook CEO also called out the heroic work of the frontline responders.

Zuckerberg, who at age 30 is already among the top philanthropists in the U.S. as measured by 2013 giving,  joins a growing cadre of wealthy individuals who have donated to stop the spread of this disease. On September 10, the Bill & Melinda Gates Foundation announced it was immediately giving $50 million to the United Nations agencies and international organizations involved in the response to help them and local governments buy supplies and build up emergency operations in affected countries.

Microsoft cofounder Paul Allen has also been quick to respond, giving $20 million to fight Ebola and launching the Tackle Ebola campaign. “A winnable battle should never be lost,” said Allen, “Now is the time to respond to this crisis with the speed and resources needed to support all who are working hard to contain, and ultimately tackle, this horrible disease.”

Africa’s richest person, Aliko Dangote, and other wealthy tycoons in Nigeria were also quick to respond, donating money to help stop the spread of the disease in Nigeria and elsewhere. Nigeria has nearly eradicated Ebola in its country and could soon be declared Ebola free.

Here is a copy of Zuckerberg’s full statement:

Priscilla and I are donating $25 million to the Centers for Disease Control Foundation to help fight Ebola.

The Ebola epidemic is at a critical turning point. It has infected 8,400 people so far, but it is spreading very quickly and projections suggest it could infect 1 million people or more over the next several months if not addressed.

We need to get Ebola under control in the near term so that it doesn’t spread further and become a long term global health crisis that we end up fighting for decades at large scale, like HIV or polio.

We believe our grant is the quickest way to empower the CDC and the experts in this field to prevent this outcome.

Grants like this directly help the frontline responders in their heroic work. These people are on the ground setting up care centers, training local staff, identifying Ebola cases and much more.

We are hopeful this will help save lives and get this outbreak under control.

Source: forbes.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/headlines/mark-zuckerberg-ebola

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Robo Advisor Betterment Works With Fidelity in RIA Push

CNBC.com article by Lawrence Delevingne

If you can’t beat the robots, join them.

BettermentThat’s what Betterment—the ultra-low cost, computer-driven personal portfolio service—hopes financial professionals will do with its new institutionally focused “robo-advisor” offering. Launched Wednesday, Betterment Institutional lets registered investment advisors, or RIAs, use a product that is seen by some as a threat to their relatively expensive and outdated money-management services.

Betterment’s core retail product has gained attention recently as awareness of low-cost, passive money management—also called “digital” advising for its automatic allocations to exchange traded funds based on investor goals—has gained popularity with entrants such as Wealthfront and Vanguard Personal Advisor Services. Launched in 2010, Betterment now has 49,000 individual customers with $875 million invested as of Tuesday.

According to Betterment and its partners, the service will help advisors by eliminating or combining many traditionally cumbersome tasks, including a paper-based sign-up process; using multiple software programs for asset allocation and tax efficiency; going between separate brokerage and custodian vendors; and using multiple tools for tax and return reporting. The end result, they say, will be saved time and money.

The product has several major votes of confidence. One is a previously unannounced collaboration with Fidelity Institutional Wealth Services, a platform for nearly 3,000 RIA firms. Fidelity will now provide information and education on Betterment to those advisors, although they will not be required to use it.

“(We) share an interest in helping advisors realize that digital advice should not be perceived as a threat, but rather an opportunity to evolve,” David Canter, an executive vice president in Fidelity’s Institutional Wealth Services unit, said in an email. “Betterment Institutional is an exceptional solution for many of our RIA clients that need a scalable, automated platform,” he added.

“Advisors have been coming to us and saying, ‘This is great. I love what you guys are doing. I’m using it myself for my personal accounts. How can I use this for my clients?’” Betterment founder and CEO Jon Stein said in a recent interview. The company made the The 2014 CNBC Disruptor 50 List earlier this year.

The product was also shaped in partnership with the two heads of major wealth advisory firms. One is Steve Lockshin, founder of Convergent Wealth Advisors, AdvicePeriod and Fortigent. The second is Marty Bicknell, CEO of Mariner Holdings, which includes Mariner Wealth Advisors and Montage Investments. Lockshin and Bicknell are investors in Betterment and plan to use the product with some of their firms’ clients (AdvicePeriod and Mariner for now). About 25 RIA firms have also been using the beta version of Betterment Institutional.

The cost for professionally advised users will be similar to Betterment’s current retail fees, plus whatever the RIA charges for additional services. Betterment now costs 0.15 to 0.35 percent of average annual assets, depending on the amount of money invested.

Betterment Institutional will feature a 0.25 percent “platform” fee regardless of assets. Stein said that with the RIA charges, the total cost for their clients would likely range from 0.50 to 1 percent. That will usually be below the 1 percent or more that advisors typically charge to clients who meet a minimum account size, say $10,000 or even $1 million.

The idea is that advisors will provide services that Betterment can’t, such as estate planning, in-depth financial guidance, trust and other family-related asset management. Betterment will be used to handle the bulk of actual client investments, including the rebalancing and tax-efficiency work that’s typically done using disparate types of software or even by hand.

Through Betterment, RIAs get a custom website featuring their branding. Clients will use the site to sign up and monitor their investments; RIAs can also review the portfolios on the back end through their own dashboard or even work with clients in real-time over shared-screen technology.

Fidelity’s Canter said that RIAs can use the Betterment service to better attract new business segments, especially those with investment amounts that previously fell below their thresholds. Fidelity research from May found that 56 percent of RIA and broker-dealer firm leaders plan to “embrace digital advice by incorporating it into their existing businesses or partnering with a digital advisor.”

Lockshin is quick to tout Betterment’s potential. Besides possibly adding a slew of smaller new clients, Lockshin said that it will help manage the portfolios of existing clients more effectively.

“It commoditizes the parts of our business that should be commoditized and lets us focus on the value-add piece of the relationship,” he said.

Lockshin estimates that RIAs will save 20 percent to 30 percent of their time because the Betterment software is so much more effective. They will also save money by buying less software.

Lockshin said he will have no investment minimums for clients on his platforms. They will begin by charging clients the 0.25 percent platform cost, and advisors in the network can then add further fees for extra service.

Advisors will be able to add investments on top of Betterment’s simple stock and bond ETF mix, but such allocations will be done outside of the platform.

CEO Stein doesn’t see RIA use of Betterment’s technology as a threat to their passive model.

“If advisors are doing that, they’re doing that already. Our product is only going to nudge them in a better direction,” Stein said. “That’s the only affect it’s going to have.”

Lockshin agreed that the RIA advisory model was compatible with Betterment’s. Some clients, he said, need more personal guidance to stick with a long-term passive plan, especially when the market sours and there’s incentive to sell.

“It doesn’t need to be a death match. We’re actually arguing it’s not us versus them, it’s us plus them,” Lockshin said. “I’m excited about it and my peers in the industry are all pretty excited about it. I think the next year’s going to be a lot of fun.”

Stein hopes that the new institutional product will help Betterment become a household name.

“We want to be the next Charles Schwab. We want to be a big, trillion-dollar asset manager,” he said. “We see this as one of the natural ways to continue to grow our franchise.”

Source:  cnbc.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/headlines/robo-advisor

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Before the Advice, Check Out the Adviser

NYT article by Tara Siegel Bernardo

brokercheckWhen Elaine and Merlin Toffel, a retired couple in their 70s, needed help with their investments, they went to their local U.S. Bank branch. The tellers knew them by their first names. They were comfortable there.

So when a teller suggested that they meet with the bank’s investment brokers, the Toffels made an appointment. After discussions and an evaluation, the bank sold them variable annuities, in which they invested more than $650,000. The annuities promised to generate lifetime income payments.

“We wanted to make the most amount of interest we could so if we needed it to live on, we could use it,” said Ms. Toffel, 74, of Lindenhurst, Ill.

What she says they didn’t fully understand was that the variable annuities came with a hefty annual charge: about 4 percent of the amount invested. That’s more than $26,000, annually — enough to buy a new Honda sedan every year. What’s more, if they needed to tap the money right away, there would be a 7 percent surrender charge, or more than $45,000.

Michael Walsh, a spokesman for U.S. Bank, said that the investments were appropriate for the Toffels, that fees were disclosed and that the sale was completed after months of consultations. But the Toffels now question whether they were given financial advice that was truly in their best interests. Like many consumers, they say they didn’t realize that their broker wasn’t required to follow the most stringent requirement for financial professionals, known as the fiduciary standard. It amounts to this: providing advice that is always 100 percent in the consumer’s interest.

Many people think that they are getting that kind of advice when they are not, said Arthur Laby, a professor at the Rutgers School of Law and a former assistant general counsel at the Securities and Exchange Commission. “Brokerage customers are, in a certain sense, deceived,” he said. “If brokers continue to call themselves advisers and advertise advisory services, customers believe they are receiving objective advice that is in their best interest. In many cases, however, they are not.”

Brokers, like those at the Toffels’ bank, are technically known as registered representatives. They are required only to recommend “suitable” investments based on an investor’s personal situation — their age, investment goals, time horizon and appetite for risk, among other things. “Suitable” may sound like an adequate standard, but there’s a hitch: It can mean that a broker isn’t required to put a customer’s interests before his own.

There are some specific situations when brokers must act as fiduciaries — for example, when they collect a percentage of total assets to manage an investment account, or when they are given full control of an investor’s account. But under current rules, a broker can take off his fiduciary hat and recommend merely “suitable” investments for the same customer’s other buckets of money. Confusing? Absolutely.

“While many brokers do right by their clients, others push bad products at high prices,” said Knut A. Rostad, the regulatory and compliance officer at Rembert Pendleton Jackson, an investment adviser, and a longtime champion of requiring a uniform fiduciary standard for brokers. “They do so because their culture celebrates sales. They do so because they can.”

IT’S a bewildering situation for consumers, particularly as they try to figure out which advisers do follow a fiduciary standard: Investment advisers, who generally must register with the S.E.C. or a state securities regulator, must put their customers’ interests first, regardless of what accounts they are working with.

This creates a muddle for investors. Say you sit down with a broker — one who isn’t legally required to act as a fiduciary — and the broker has access to a dozen mutual funds, all of which are deemed “suitable” for a particular customer. The broker can recommend the most expensive fund, even if it makes him more money at the consumer’s expense and isn’t preferable in any other way, Professor Laby said.

On the other hand, if advisers are following a fiduciary standard, the proper course is clear: “They have to recommend the one that is the lowest cost” because that will be in a consumer’s best interest, he added.

Regulators have been considering whether stronger rules are needed. The Dodd-Frank financial regulatory law of 2010 gave the S.E.C. the authority to propose a rule that would require brokers to act as fiduciaries — but the law didn’t actually require the S.E.C. to enact new regulations. The agency hasn’t yet decided whether it will move forward. Two Republican commissioners have publicly questioned whether it is necessary.

The Labor Department expects to issue a new proposal in January for a rule that would broaden fiduciary requirements for retirement accounts. In 2010, the department withdrew an earlier proposal after fierce opposition from the financial services industry.

Investors can’t simply accept an adviser’s title at face value. For example, certified financial planners, a professional designation with some of the more rigorous curriculum and experience requirements, pledge to put their customers’ interests ahead of their own when providing advice — and can lose their designation if they don’t. But even they do not have to act as fiduciaries if they are just selling an investment without including any advice, said Craig W. Lemoine, a program director at the American College of Financial Services in Bryn Mawr, Pa.

To make matters worse, many brokers call themselves “advisers,” a term that suggests consumers can unequivocally trust their counsel much as they might trust the family physician’s. Merrill Lynch, for instance, recently introduced an approach called Merrill Lynch Clear — which is essentially a way for the company to set up a conversation with customers about their longer-term goals and priorities, including family or health issues or whether they need long-term care insurance. Merrill advertises this approach on its website as a conversation with a “trusted adviser,” though not all of its “advisers” are legally bound by a fiduciary duty. Matt Card, a Merrill Lynch spokesman, says the firm’s focus on customers’ broad goals is designed to put a client’s interests first, regardless of whether its representatives are acting as fiduciaries.

Even if stronger protections are enacted, some advisers at financial firms may face potential conflicts of interest, depending on issues like sales goals or incentives that encourage them to push financial products that aren’t ideal for customers.

A former senior account executive at Fidelity, who left last year to join a small independent firm, said he was given sales targets that helped to determine whether he would receive bonuses or retain his job. (He spoke on condition of anonymity, saying he needed to protect colleagues who were still at the company.)

“By far, the biggest two weightings were on your ability to sell annuities and portfolio advisory services,” he said, referring to a program in which Fidelity investment accounts are managed for a fee. “So if you hit all the other goals but missed one of these two, there was a good risk that you could be put on verbal or written warning and quite possibly terminated.”

Joseph Madden, a Fidelity spokesman, said representatives’ compensation is based on whether their advice was appropriate for the customer, as well as other factors related to sales, service and customer satisfaction.

Advisers’ pay can provide clues about whether their interests may be mismatched with consumers’.

At the largest brokerage firms — Merrill, Wells Fargo, UBS and Morgan Stanley — there are incentives to bring in new money. These firms typically pay their brokers and advisers 45 to 55 percent of fees and commissions generated for their companies, explained Alois Pirker, research director of wealth management at the Aite Group, which tracks and advises the financial services industry.

“They are very much hunters,” he said. “They are hunting for assets.”

Some brokers may collect a higher percentage of the money they generate for the firm once they hit certain thresholds. That may reward hard workers, as outlined in a 2013 report from the Financial Industry Regulatory Authority, the brokerage industry’s private self-regulator. But it could also encourage an increase in the number or a shift in the types of recommendations that brokers make to customers.

Conflicts can also arise when a brokerage firm receives money from, say, a mutual fund provider through a practice known as revenue sharing: Those funds may land on a “preferred list,” which a broker may favor.

It may be less confusing for consumers to simply pay for advice through “fee-only” independent financial planners who are fiduciaries. Independent planners typically charged from 0.85 percent to 1.15 percent of assets at the end of 2013, according to Cerulli Associates, though fees can vary depending on how much you have to invest. (There is always the additional cost of the underlying investments, though they can be quite low.) Often, in addition to investment advice, those fees cover issues like how much to save or how much term life insurance to buy.

Other advisers charge a single flat fee or hourly fees. The National Association of Personal Financial Advisors and the Garrett Planning Network are groups of fee-only planners, while a network of advisers, called the XY Planning Network, charges subscription fees, typically around $100 a month.

IF consumers really want to put prospective advisers to the test, they could try a direct approach: Ask them to sign an oath stating they will act as fiduciaries, like the one recently created by the Committee for the Fiduciary Standard, an advocacy group. Andrew Stoltmann, a securities lawyer in Chicago, said such an oath would be binding in an arbitration proceeding, which is how a vast majority of customer disputes are settled. “If the adviser refused to sign it, then the investor should run for the hills,” he said.

A fiduciary pledge doesn’t protect an investor from outright chicanery, however. Consider the case of the former Seattle investment adviser Mark Spangler, who was sentenced to 16 years in prison for defrauding customers and money laundering. He previously served as a chairman of the National Association of Personal Financial Advisors, a group whose advisers pledge to act as fiduciaries.

Barbara Roper, director of investor protection at the Consumer Federation of America, said a fiduciary standard might protect people from brokers who are acting legally but who aren’t recommending the best options for them. “Evidence overwhelmingly suggests that investors suffer real financial harm — albeit unquantifiable harm — as a result of so-called ‘advice’ to invest in products that have high costs, that expose them to unnecessary risks or that simply offer mediocre performance relative to other options,” Ms. Roper said.

The Toffels, who bought their investments through their bank’s brokerage unit, now wish they had taken much more care in choosing their advisers. “We thought they could help us invest our money smartly and soundly and that just hasn’t happened,” Ms. Toffel said.

When the couple initially went to the bank for investment help, they had a portfolio of low-cost Vanguard funds, with an allocation in the stock market that was probably too high, according to the Toffels’ son-in-law, Christopher Lombardo. But following the bank’s advice, instead of merely adjusting that portfolio, they sold it and paid taxes on the capital gains. They put most of their money in the annuities, which were invested in mutual funds and paid 5 percent each year.

But the illiquidity of the annuities caused serious problems last year, Ms. Toffel said.

While the couple followed the bank’s suggestion and held more than $200,000 in money market funds, they found that they were short of cash because their life situation had changed: Mr. Toffel, 78, received a diagnosis of Alzheimer’s and needed to move into a skilled nursing facility, while Ms. Toffel wanted to buy an apartment in the same senior community. But much of their money was locked inside those very costly annuities, which carried the 7 percent surrender charge.

“I was sick about it,” said Tammy Lombardo, the couple’s daughter.

Her husband, Mr. Lombardo, has spent many hours documenting their predicament and petitioning the bank for a hardship withdrawal, which has been successful.

They ultimately received some of the money from the annuities without paying the surrender charge, but they are still trying to undo other changes made by the bank to their financial arrangements.

“It’s been a mountain of red tape and hoops to jump through,” Mr. Lombardo said.

________

Gauging the Advice

BROKERS OR REGISTERED REPRESENTATIVES

Required to make “suitable” recommendations to investors based on criteria like age, goals, time horizon and risk appetite. Generally not required to put customers’ interest first at all times, a standard called fiduciary duty.

Background Check: For information on a specific broker, try the BrokerCheck website, at finra.org/Investors/ToolsCalculators/BrokerCheck/. It covers brokers and firms registered with the Financial Industry Regulatory Authority, or Finra, Wall Street’s self-regulator. But Finra’s system has been criticized because some brokers have had complaints expunged from their records.

REGISTERED INVESTMENT ADVISERS

Required to put customers’ interests ahead of their own — that is, they are required to act as fiduciaries. Advisers and their firms generally register with the Securities and Exchange Commission or a state securities regulator.

Background Check: For information on specific advisers, try the Investment Adviser Public Disclosure website, reachable at adviserinfo.sec.gov. It scans S.E.C. data, as well as BrokerCheck and state securities regulators’ sites.

BE SURE TO ASK

Because some people giving financial advice are dually registered as brokers and investment advisers, ask them which hat they are wearing — and whether they are acting as fiduciaries. Then get it in writing.

Source: nytimes.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/headlines/check-out-the-adviser

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The Crummey Trust: Not So Crummy

Wills, Trusts & Estates Prof Blog post by Gerry W. Beyer

trTraditionally, estate-planning trusts contained “Crummey” withdrawal powers to ensure that contributions qualify for the annual gift tax exclusion.  Today, the exclusion allows you to give up to $14,000 per year, and $28,000 for married couples, to any number of recipients.

Although fewer people must worry about gift and estate taxes, for many, the annual exclusion is still an important estate planning strategy.  Consequently, Crummey powers are still relevant and useable.

There are two important reasons to make annual exclusion gifts: if your wealth exceeds the exemption amount and if annual gifting guarantees that the amounts you give are permanently removed from your taxable estate.

The annual exclusion is obtainable only for gifts of “present interests.”  However, a contribution to a trust is a future interest.  Thus, to bypass this obstacle trusts provide beneficiaries with Crummey withdrawal powers. These powers give beneficiaries the right to withdraw trust contributions for a limited period of time (30-60 days), making it possible to convert a future interest into a present interest, even if the withdrawal rights are never exercised.

A trust must give beneficiaries real withdraw powers in order to effectuate Crummey powers.  This means you cannot have an agreement with your beneficiaries—express or implied—that will not exercise their withdraw rights.  The trust should also contain sufficient liquid assets so beneficiaries can exercise their withdraw rights.

See E. Hans Lundsten and Joseph Marion, III, The Crummey Trust: Still Relevant After All These Years, Insight on Estate Planning, October/November 2014.

Source:  lawprofessors.typepad.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/news/crummey-trust

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A Shocking Statistical Look at Estate Planning [infographic]

This graphic illustrates the current state of estate planning in the U.S.

Created by The Virtual Attorney.

Percent of Americans without a Will  Infographic    The Virtual AttorneySOURCE: http://thevirtualattorney.com/blog/shocking-statistical-look-estate-planning-infographic

 

 

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Webinar on Insurance Trusts

Wills, Trusts & Estates Prof Blog post by Gerry W. Beyer

insWolters Kluwer, CCH is sponsoring a webinar entitled, Insurance Trusts: Practical Planning and Practice Development Ideas for Lots of Clients, Tuesday, October 28, 2014, at 2 pm Eastern. Provided below is a description of this webinar:

Life insurance trusts have been a key component of estate and financial plans for decades. With the increased importance of income taxes relative to estate taxes, many clients will benefit from the use of grantor trust swap powers, tax free build up inside life insurance policies held by trusts, and the income shifting opportunities these trusts can provide.

Discussion topics include:

  • A practical review of how recent tax law changes and planning conventions have changed
  • How to help clients plan for existing and new irrevocable life insurance trusts (ILIT)
  • How to provide additional planning services to clients in the new tax environment
  • Resources to support with financial and estate planning

Source:  lawprofessors.typepad.com

Posted by:  Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/news/webinar-on-insurance-trusts ‎

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Abigail Johnson Succeeds Father as CEO of Fidelity Investments

Abigail P. Johnson has been named CEO of Fidelity Investments, effective immediately.

She replaces her father, Edward “Ned” Johnson, who will retire from the position but remain as chairman of the company. Ms. Johnson will retain her current role as president.

Gerry McGraw, president of Fidelity Institutional, and Mike Wilens, president of Fidelity Enterprise Services, have been elected directors of the company. In addition, FMR board member Bill Byrnes has been named board member emeritus.

Fidelity had $2.069 trillion in global assets under management as of June 30.

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